Universal life insurance lawsuits underscore product risk
Universal life insurance lawsuits may cause you to rethink your policy.
Updated December 11, 2023
Universal life insurance lawsuits have been much in the news in recent years. Major players in the universal life insurance space have been accused of raising the cost of insurance in certain policies. Others faced lawsuits over allegations of overcharging policyholders.
What does that mean for you?
In this article, we will review case studies of major settlements in universal life insurance lawsuits. More broadly, we will look at the downsides of universal life insurance policies, how to get out of a universal life insurance policy, and whether you get money back if you do.
Here is everything you need to know about universal life insurance lawsuits—and more.
Overview of universal life insurance lawsuits
Recent lawsuits have been filed against insurers over their universal life insurance policies, with critics saying regulations haven’t gone far enough. These lawsuits highlight the risks these products can pose to unwary financial advisers and clients alike.
Universal life insurance differs from other products such as term and whole life insurance. Universal life insurance—which is permanent, cash-value life insurance—allows buyers to make flexible premium payments. That flexibility enables buyers to fund policies with a relatively low amount of premiums to keep the insurance going.
A cost increase could, however, leave these clients with a difficult decision. They can either pay a considerably higher annual bill to keep the contract afloat or lapse the policy altogether.
“They don’t know what they can do,” James Hunt, the Consumer Federation of Americas life insurance actuary, told Investment News in 2018. “They paid a premium and they thought they paid for life, and now (they are) facing extremely high premiums to keep them going.”
Universal life insurance lawsuits: case studies of major settlements
There are numerous case studies of major settlements in universal life insurance lawsuits in recent years.
Transamerica Life Insurance Co., AXA Equitable Life Insurance CO., and Lincoln National Corp. are examples of firms that have recently been caught in the crossfire of litigation. Each has been accused of raising the cost of insurance in certain universal life policies.
Nationwide Life Insurance Co. also privately settled a lawsuit with two individuals in 2018 relative to variable universal life insurance costs.
John Hancock Life Insurance Co. settled a lawsuit related to universal life insurance costs that same year for $91.25 million.
Univeral life insurance lawsuits: allegations of overcharging policyholders
The recent wave of lawsuits, which began cropping up around 2015, has targeted universal life insurance policies sold in the 1980s and 1990s, experts said. Insurers offered an attractive guaranteed minimum interest rate to policyholders of about 4% and 5%. These were supported by higher interest rates set by the federal government during this period.
A decade of rock-bottom interest rates in the wake of the financial crisis hurt insurers’ profitability. That reduced the return on bonds underpinning their products.
Universal life insurance policies contractually allowed insurers to adjust insurance costs up to a maximum rate based on certain factors. However, plaintiffs broadly claimed that insurers raised costs to make up for bad bets on interest rates. Insurers claimed the increases were warranted, due to factors such as mortality conditions that increase the frequency of claims they have to pay.
The Consumer Federation of America sent a letter to all state insurance commissioners in 2016, saying that many universal life insurance policies “are failing or will soon begin to fail absent much higher interest rates.” The cost increases relevant to the spate of class-action lawsuits in 2018 extended into the double and triple digits on a percentage basis.
“It’s in bad faith,” Joseph Gentile, partner at Sarraf Gentile who represents plaintiffs in the Lincoln National case, said of the increases. “It’s not really tied to mortality; it’s tied to the change in the interest rate environment. The actuaries priced things wrong way back when.”
Hank Williams, spokesman for Transamerica, and Lincoln spokesman Jay Russo said at the time that it’s against their respective companies’ policies to comment on pending litigation. A spokesperson for AXA didn’t return a request for comment at the time.
How do you get out of universal life insurance?
Whatever the reason, you have every right to get out of universal life insurance. There are two common ways to get out of your life insurance policy. You can either cancel or sell. In this section, let’s break down both.
Cancelling universal life insurance
Cancelling your universal life insurance policy is relatively easy. To do so, you can take one of the following steps:
- Call or write to your insurer to tell them you would like to cancel your policy
- Stop paying your premiums, which will let the policy lapse
- Visit your insurer’s website and fill out an online cancellation form (if the option is given)
If you have a universal insurance policy, you can cancel at any time. You will not get back any premiums that you paid, but you might get a payout from the cash value. Of course, that is only if any has accrued. Keep in mind, however, that there are surrender fees taken from your cash value if you cancel during the policy’s earlier years. (Those fees are specific to your policy.)
When cancelling your universal life insurance, your insurer might offer you non-forfeiture options, which include:
- Cancel, then cash out: You do have the option to cancel your universal life insurance policy and cash out altogether. In this case, you take the surrender value of the policy and forfeit future life insurance coverage. If you do not notify your insurance company, letting your policy lapse, this is usually the default option.
- Convert the policy to an extended term: In this next option, you can use your cash value to purchase a term policy with the same death benefit included in your universal life insurance. When the term of the policy ends, you will lose your coverage.
- Go with reduced paid-up option: A reduced paid-up option allows you to select a lower policy death benefit. It also allows you to make a one-time premium payment that is equal to your cash value. You will still have a permanent policy, as opposed to a term policy. This means that your coverage will remain in force for the rest of your life. It also guarantees to pay your beneficiaries a death benefit, when you die.
Selling universal life insurance
nstead of lapsing your universal life insurance, or choosing the non-forfeiture option, you can sell your policy and receive a payment in lump sum. This option is called the life settlement option, which means a third party will pay you money for your policy.
Several variables determine the settlement amount you will receive. These variables include your health condition, your age, and the face amount of your policy. Previously, a life settlement was only available to those with impaired health. Now, due to recent industry innovation, even healthy people can qualify. However, eligibility still depends on several additional factors.
Most payouts are more than the policy’s cash value and less than the death benefit of the policy. Most of the time, life settlement investors are interested in working with people over 60 years of age. They are also interested in selling universal life policies with a face amount of $100,000 minimum.
Do I get money back if I cancel my universal life insurance?
Yes. If you surrender your universal life insurance policy, you end your coverage and get money back (minus the surrender charge stated in your policy). Typically, universal life insurance offers a cash value component. This means you can take money out of cash value through a policy loan or a withdrawal.
What are the drawbacks of universal life insurance?
While there are many benefits to universal life insurance, there are also drawbacks. One of them is that universal life insurance policies usually do not have fixed interest rates. This means they are more unpredictable than whole life insurance policies.
Let’s say you miss a payment on a universal life policy, or you do not contribute enough to the cash value. In this case, you could wind up making multiple large payments just to keep your coverage. In other words, universal life insurance requires that you monitor your policy.
Another drawback to universal life insurance is there is more exposure to risk. When interest rates increase, universal life insurance may sound like a great idea. If they drop, however, your cash value account might not grow the way you had hoped. (Keep in mind that universal life insurance policies usually do come with guaranteed minimum interest rates.)
Universal life insurance lawsuits: know what you’re getting into
Universal life insurance lawsuits have been at the forefront in recent years. Just because they have been litigated does not mean that all universal life insurance policies are bad. It also doesn’t mean that you should avoid them. But it can’t hurt to be aware of the allegations and case studies of major settlements.
If, however, you do decide to get out, or change policies, you should be prepared.
To find out more about universal life insurance lawsuits, get in touch with one of the financial advisors that we highlight in our Awards & Recognition section. Here you will find the top-performing financial advisers across the USA.
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